22/03/2015

Despite some rally registered late on Friday, crude markets appear tumbling again, rattling an already-shaken oil industry. Prices fell 10 percent last week, approaching the lowest in six years. With supplies continuing to rise and the summer driving season still months away, the downward slide is expected to continue - for some more time. Already the markets are flirting with the possibility of dipping even below the $40 mark.

A number of factors seem to be impacting. The possibility of a deal between Iran and the West on the nuclear issue is lurking on the horizon. Many now feel that the deal is imminent, making the markets somewhat nervy and itchy. “We are going to have a deal,” Prince Turki Al-Faisal, was quoted as saying in London last week. “How good or how bad it is I don’t know because we haven’t seen the details.”

Any such deal carries ominous bearings on crude markets. It could unleash an additional one million bpd of Iranian crude, on an already oversupplied markets. Iranian Oil Minister Bijan Namdar Zanganeh said March 16 that with the deal, Tehran would be able to raise production by a million bpd, bringing it to 3.8 million, “within a few months.” And most agree - this could push crude prices even lower. With the economic slowdown in China and Europe, supply is already exceeding demand by about two million bpd. In case Iran could add another one million bpd on top, it definitely has the capacity to soften the markets further, most seem convinced.

And that’s just the beginning, says Fadel Gheit, an energy analyst with Oppenheimer & Co. “Oh absolutely. The one million barrels, that is the appetizer,” Gheit says. “That is not the main meal yet.” Oil companies from around the world would like to get into Iran and develop its reserves to bring much more oil online down the road, he argues. Markets are definitely keeping a close track of this interesting development on the geopolitical energy chessboard.

However, as markets remain oversupplied, with little prospects of any tightening in short term, dollar’s surge to a 12-year high has also wreaked havoc in the markets. In fact crude markets renewed their downward slide, amid speculation that a slowdown in drilling isn’t enough to shrink a global oversupply. US production and stockpiles have continued to expand from 30-year highs even as companies have pulled a record number of rigs from the country’s oil fields. All these are bad news for crude markets.

US crude stockpiles rose 9.62 million barrels to 458.5 million in the seven days ended March 13, according to the EIA. That’s the highest level in weekly records from the Energy Department’s statistical arm dating back to August 1982. US crude output too accelerated by 53,000 barrels a day to 9.42 million a day, the fastest pace since at least January 1983.

Inventories at Cushing, Oklahoma, the delivery point for WTI contracts, climbed by 2.87 million barrels to 54.4 million, the highest level since April 2004, the report showed. Stockpiles at the nation’s biggest oil-storage hub have surged by almost 70% this year.

If crude continues to go into storage at its current pace, Cushing’s tanks will be full within a couple of months. That would push more oil to the spot market, sending prices to slide once again. Goldman Sachs President Gary Cohn said recently that prices could fall to as lows as $30 a barrel if the US runs out of storage space. Ed Morse, the global head of commodities research at Citibank, predicted oil could go as low as $20.

The failure of high cost North American producers to cut production in an oversupplied world oil market is thus setting the stage for another leg down in oil prices. And it was perhaps in this background, the OECD energy watch dog, the IEA, too warned that oil markets drop is still to run its full course. Underlining that the United States may soon run out of spare capacity to store crude, it emphasized it would put additional downward pressure on prices. “US stocks may soon test storage capacity limits. That would inevitably lead to renewed price weakness, which in turn could trigger the supply cuts that have so far remained elusive,” the IEA said. The process however, would last at least until the second half of 2015, when growth in US oil production could begin start abating.

In February, non-OPEC production is estimated to have risen by about 270,000 barrels per day (bpd) on a month-on-month basis to 57.3 million bpd, led by higher output in North America. Global supply rose by 1.3 million bpd year-on-year to an estimated 94 million bpd in February, led by a 1.4-million-bpd gain for non-OPEC producers.

“While the US supply response to lower prices might take longer to kick in than expected, it might also prove more abrupt,” the IEA said, adding that (the output) growth would abate in the second half of 2015.

Mexican Finance Minister Luis Videgaray too said underlined week that he does not expect the plunge in oil prices to be over any time soon. “Our opinion is that there’s a low probability that we’ll see a quick recovery in the export oil price, not in the next few weeks, nor even years,” Videgaray said at a recent event in Mexico City.

In its latest report, the OPEC too has slashed the call on its oil and expects a cut in US tight oil production earliest by late 2015. This was in line with the IEA projections too. US oil output could start to take a hit by late 2015 due to low prices, OPEC said in its latest Oil Report. “As drilling subsides due to high costs and a potentially sustained low oil price, a drop in production can be expected to follow, possibly by late 2015.”

For now, OPEC forecast no further rise in demand for its crude in 2015, trimming its projection slightly to 29.19 million bpd, and left unchanged its estimate of global growth in oil demand this year.

Despite issues in Libya and Iraq and indeed a blip here and there, glut continues to haunt the crude markets. And this is not going to change any time soon. Soft markets are here to stay for some more time, one could now say with some conviction.

Syed Rashid Husain - Saudi Gazette